Budget 2013: Pay more for cigarettes; excise duty hiked by 18%

Moneycontrol Bureau

Smokers get ready to pay more. Excise duty on cigarette has been increased by 18 percent in the Union Budget for 2013-14.

The move will hit companies like ITC and VST Industries in the short-term as volumes are likely to get impacted. However, the companies almost always are able to pass on the duty hike on to customers, and so there is unlikely to much impact in the medium-to-long term.

Last year, the government had levied a 10% retail price-based excise on cigarettes longer than 65mm.

ITC shares closed unchanged at Rs 294.80 on NSE, while rival VST Industries ended down 0.2% at Rs 1600.20. Godfrey Phillips was down 0.5% at Rs 3,015.80.  

Kaustubh Pawaskar, analyst at Sharekhan says the companies will hike cigarette prices in order to maintain margins.

"ITC, for instance, will have to increase cigarette prices by 15 percent to mitigate the impact of the hike in excise. The hikes will happen in a phased manner across brands," Pawaskar said.

He expects volumes may get impacted for a couple of quarters but should improve from the Oct-Dec quarter.

Elsewhere, the government announced increase in allocation on various rural social schemes, which will help boost consumption in small towns and villages, analysts feel.

That apart, there was not much positive coming out of the Budget for the FMCG sector. The companies were hoping for a clear timeline for GST implementation. However, that didn't happen.

A hike in income-tax slabs would have bee positive as it would have increased disposable income and thus consumer spending. But the Finance Minister didn't make any changes. 

Moreover, the super-rich on the other hand will have to pay a 10% surcharge on income of Rs 1 crore and above.

Although the surcharge is unlikely to affect their spending power, the overall slowdown in discretionary spending seen by companies like Hindustan Unilever in recent months is expected to continue as growth and inflation pressures remain.  

Nachiket Kelkar
nachiket.kelkar@network18online.com